Institute Alert

• The U.S. Treasury announced on August 19 that it will at least double the size of its ongoing repurchases of 10- to 30-year Treasuries, from a maximum of $2 billion to at least $4 billion per operation, in an effort to improve liquidity and ease upward pressure on long-term interest rates.
• 10-year and 30-year U.S. Treasury yields fell six and ten basis points, respectively, after the announcement, but yields reversed overnight into August 20 to erase the fall in yields. (A basis point is 1/100 of a percent.)
• Also on August 19, U.S. Treasury debt crossed $40 trillion, to keep the debt and deficits fresh on investors’ minds.
• Between March 2 and August 20, the 10- and 30-year Treasury yields have risen 76 and 64 basis points.
• U.S. equities were mixed over August 19-20, responding positively to the Treasury’s buyback change but negatively to the announcement overnight into August 20 of new sanctions against Iran.
• The sanctions threaten to extend the war and have pushed the price of oil to its highest since July 24, as measured by the overnight European Brent crude oil spot price.
• Across August 19-20, international equity markets were mixed, in our view, mainly weighing the rising price of crude oil.
• The U.S. dollar’s exchange value against a basket of major currencies slid by 1% from August 18-20 but remains in its wartime trading range.¹

• Treasury buyback operations may improve market liquidity and help reduce some near-term volatility in the long-dated Treasury maturities, but we do not believe the August 19 announcement materially changes the longer-term outlook for interest rates.
• The Treasury was already using buybacks and increased issuance of shorter-term Treasury bills to manage its borrowing costs. But the August 19 announcement came after the Treasury’s regular quarterly refunding announcement and likely signals the Treasury’s discomfort with the recent rise in yields.
• Stock prices historically have absorbed higher rates when yields rise gradually. The bigger potential risk for equities is not simply higher rates, but rapid and volatile rate repricing that disrupts confidence, valuations, and financial conditions. We do not see those conditions now.
• We recently published upwardly revised earnings targets that imply faster earnings growth through 2027 than our prior expectations for most U.S. and international equity asset classes.² We believe that these earnings will drive higher equity prices into 2027.

While Treasury's expanded buyback program may ease some near-term pressures in fixed-income markets, it does not alter our broader investment guidance. We believe the Federal Reserve (Fed) will tighten policy if inflation proves more persistent than expected, and this should prevent volatility in long-term yields. We now anticipate one Fed rate hike this year and another next year. We maintain our year-end 2027 10- and 30-year Treasury yield targets at 4.50%–5.00% and 5.25%–5.75%, respectively.

We continue to favor Short Term Fixed Income, which offers attractive yields while preserving flexibility. In our view, maintaining shorter-duration exposure allows investors to earn competitive income while retaining the ability to take advantage of future opportunities should market conditions change.

We continue to favor U.S. Large Cap Equities, where strong balance sheets, pricing power, and resilient earnings growth should remain important advantages in a higher-rate and stickier-inflation environment. Earnings growth remains the primary driver of our constructive equity outlook, and we recently raised earnings-per-share expectations across most major equity asset classes. We remain neutral on Developed Market ex-U.S. and Emerging Market Equities, where improving earnings prospects, particularly from artificial intelligence-linked investment in North Asia, are balanced by greater exposure to energy costs, global interest rates, geopolitical uncertainty, and semiconductor-related volatility.

We prefer sectors exposed to secular growth trends and that can retain pricing power, including Communication Services, Information Technology, and Materials. As interest rate volatility may rise, we remain neutral on rate-sensitive sectors such as Utilities and Financials.

¹ The Intercontinental Exchange U.S. Dollar Index is a weighted average of the value of the U.S. dollar relative to a basket of U.S. trade partner currencies composed of the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona, and Swiss franc. A higher index value indicates dollar appreciation. An index is unmanaged and not available for direct investment.

² The Intercontinental Exchange U.S. Dollar Index is a weighted average of the value of the U.S. dollar relative to a basket of U.S. trade partner currencies composed of the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona, and Swiss franc. A higher index value indicates dollar appreciation. An index is unmanaged and not available for direct investment.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

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